In Chapter 4, “Find and Rate Your Value Drivers,” we provide a list of these 45 characteristics that influence the value of a business. Here is the complete list. Two stars represent the core value drivers that should be considered for any company.
Your Market
Value driver 1: ★★ Market size and potential value. Consider the overall market for your products/services.
Value driver 2: Market trends. Is your market growing or declining? Are there changes coming that could impact your business?
Business Model
Value driver 3: Business premise. Do you have a good business thesis and a plan for the future, or are you hanging on in a legacy business whose best days are behind it? Are you a challenger or an incumbent, and what does each mean for your growth plan?
Value driver 4: Intellectual property. Do you have patents, trademarks or unique business processes, or content protected by copyrights? These protections help create a moat around your business that makes it hard for competitors to breach.
Value driver 5: Revenue stability. Does your revenue remain consistent or vary widely from year to year? Stable revenue implies consistent sales. Note that “stable” and “consistent” do not mean “flat.” Steady growth is fantastic.
Value driver 6: ★★ Profitability and return on invested capital. How profitable is your business, and is it organized in a way that you can achieve good returns on your investments?
Value driver 7: Core competencies. What capabilities does your company have that make your business work?
Value driver 8: ★★ Barriers to entry. If somebody else wanted to jump into your business tomorrow, what obstacles would the person face? Is your product especially difficult to make, or are there regulations or required approvals that limit competition?
Value driver 9: Economies of scale. Do you have special advantages in your operation that allow you to grow your business more efficiently than your competitors? Typically, these occur in manufacturing businesses.
Value driver 10: Visibility of future revenue. Do you have a sales pipeline that stretches into the future? How far can you predict your revenue?
Company Profile
Value driver 11: ★★ Brand equity. How well is your brand known by customers and prospects? As with intellectual property (value driver 4), brand equity discourages competition.
Value driver 12: Culture. Can you define what your culture is and why employees find it attractive? Is your company a champion of diversity? Does it support causes that are important to your employees?
Value driver 13: Organization infrastructure. Are you organized in a way that allows you to respond to challenges with agility and resilience?
Value driver 14: ★★ Competition. Where do you rank among the competition, and do you have competitive advantages that give you an edge? This is one of those areas where you must be especially careful to put pride and sentiment aside and think objectively.
Value driver 15: Innovation. In value driver 4, we addressed your existing intellectual property. The ability to continually refine your products and services and develop new ones represents another big plus.
Value driver 16: ★★ Growth dynamics and scalability. A key requirement for a good investment is growth. Its twin is scalability. Can you add new products or services, expand your geographic footprint to other countries, and/or grow your existing business without being overwhelmed?
Products and Services
Value driver 17: ★★ Market share. As a rule, the more of your market you control, the greater your valuation will be. Market share is one of the key value drivers and almost certainly deserves a place on your list.
Value driver 18: Product life cycle. Consider how many years your flagship products have remaining in their life cycle. At what point will they need to be replaced or risk becoming defunct? A longer life span removes risk and increases your value.
Value driver 19: Pricing power. The ability to raise prices without a significant decline in sales indicates pricing power. Investors prefer companies that can increase prices rather than those whose sales are highly sensitive to pricing.
Value driver 20: Supply chain. Do you have reliable access to the essential materials you need to manufacture your products and operate your business? What are your contingency plans in case your usual supply chains are disrupted?
Value driver 21: Manufacturing quality. Take emotion and pride out of the equation when you consider this question. Frequent complaints about quality will diminish your value and make your business more vulnerable to competition.
Value driver 22: Store locations and distribution channels. How do you get your products or services to market? Better locations and broader distribution channels add to your value.
Value driver 23: Time to market. How quickly can you get finished products or services to market? What is the average for your industry, and how do you compare? This will be more vital for some industries than others.
Your Team
Value driver 24: ★★ Leadership: This quality is among the most delicate for you and your team and among the most important to assess as objectively as possible. Leadership is likely a key part of your valuation and is often considered in combination with the next value driver, management team.
Value driver 25: Management team. Are you dependent on one senior executive, or does a deep bench support her? If you lose team members, can others take their place without missing a beat?
Value driver 26: Labor pool. Do you have access to the right population for future employees? Do they have the skills you need? What is the competition like for the best employees?
Value driver 27: Employee satisfaction. Are yours enthusiastic and committed to your success? What is your turnover rate? What is your rating on Glassdoor?
Customer Relationships
Value driver 28: Quality of the customer base. If you cater mainly to other businesses, are they blue chip or outfits nobody has heard of? If your customers are consumers, are their demographics attractive?
Value driver 29: Customer engagement. What is the average tenure for your clients or customers? Is your renewal rate high, or do customers consistently drop away and need to be replenished? Engaged and committed customers are valuable to any business.
Value driver 30: Customer diversity. Are you dependent on a few clients who represent most of your revenue? This could expose your business to sudden decreases in revenue and profits.
Value driver 31: Customer experience. How do customers rate your business, and what level of trust do your relationships generate? Is that rating improving or declining?
Value driver 32: Customer acquisition cost. Does it take weeks or months of wooing to land new clients or customers, or do they actively seek out your products and expertise?
Third-Party Relationships
Value driver 33: Joint venture partners and strategic alliances. Do you have partners who make your business more effective? There is the magic formula where one plus one equals three, when each brings something important to the relationship and helps create a stronger whole.
with vendors favorable or onerous? Do you have good relationships with your vendors? In a crisis, will you get priority over others?
Value driver 35: Licensing partners. Many businesses make significant profits by licensing their intellectual property to others.
Value driver 36: Franchisor-franchisee relationships. If your model depends on your relationship with a franchisor, is it a story of mutual benefit and growth, or has it been strained by conflicts? Is the franchisor a well-regarded company in its own right? These questions will have an important influence on your value.
Value driver 37: Advisors. Is the industry guru part of your team? Board members and consultants can add value to your business.
Finance and Planning
Value driver 38: Reliable financial planning and reporting. Sound financial management–including a strategic plan, audited financials, and an annual budget—is essential to success. Poor financial systems are a significant risk that decreases value.
Value driver 39: Acquisition expertise. Is your team skilled at acquiring businesses, with experience doing so?
Value driver 40: Financial controls. How good are your financial controls and safeguards against theft and financial irregularities?
Value driver 41: Capital requirements. Does your business have high or low capital expenditure requirements? Low requirements for day-to-day operations free up capital for other purposes.
Value driver 42: Access to capital. Midsize companies may have limited options in tapping additional equity or debt capital. Do the principals in your company have deep pockets and a willingness to invest more? Do you have an established credit line with your bank?
Investments
Value driver 43: Technology and R&D. Is your technology up to date or in need of an overhaul? Have you invested enough in R&D to protect future revenue? Investors like to see companies that have consistently invested in R&D
Value driver 44: Growth investments. Do you have investments in new businesses that could bring future value to your company? Alphabet has made many bets on new businesses that are different from Google and that could add tremendous value to the parent company. Unlike acquisitions, these new business possibilities are incubated within your company.
Value driver 45: Cybersecurity. Another key consideration is the effectiveness of your systems for handling cybersecurity risks. In an age when hackers may strike from within your own walls or from the other side of the world, the safety of your business, your clients, and your reputation relies on investing in robust defenses.
Your Market
Value driver 1: ★★ Market size and potential value. Consider the overall market for your products/services.
Value driver 2: Market trends. Is your market growing or declining? Are there changes coming that could impact your business?
Business Model
Value driver 3: Business premise. Do you have a good business thesis and a plan for the future, or are you hanging on in a legacy business whose best days are behind it? Are you a challenger or an incumbent, and what does each mean for your growth plan?
Value driver 4: Intellectual property. Do you have patents, trademarks or unique business processes, or content protected by copyrights? These protections help create a moat around your business that makes it hard for competitors to breach.
Value driver 5: Revenue stability. Does your revenue remain consistent or vary widely from year to year? Stable revenue implies consistent sales. Note that “stable” and “consistent” do not mean “flat.” Steady growth is fantastic.
Value driver 6: ★★ Profitability and return on invested capital. How profitable is your business, and is it organized in a way that you can achieve good returns on your investments?
Value driver 7: Core competencies. What capabilities does your company have that make your business work?
Value driver 8: ★★ Barriers to entry. If somebody else wanted to jump into your business tomorrow, what obstacles would the person face? Is your product especially difficult to make, or are there regulations or required approvals that limit competition?
Value driver 9: Economies of scale. Do you have special advantages in your operation that allow you to grow your business more efficiently than your competitors? Typically, these occur in manufacturing businesses.
Value driver 10: Visibility of future revenue. Do you have a sales pipeline that stretches into the future? How far can you predict your revenue?
Company Profile
Value driver 11: ★★ Brand equity. How well is your brand known by customers and prospects? As with intellectual property (value driver 4), brand equity discourages competition.
Value driver 12: Culture. Can you define what your culture is and why employees find it attractive? Is your company a champion of diversity? Does it support causes that are important to your employees?
Value driver 13: Organization infrastructure. Are you organized in a way that allows you to respond to challenges with agility and resilience?
Value driver 14: ★★ Competition. Where do you rank among the competition, and do you have competitive advantages that give you an edge? This is one of those areas where you must be especially careful to put pride and sentiment aside and think objectively.
Value driver 15: Innovation. In value driver 4, we addressed your existing intellectual property. The ability to continually refine your products and services and develop new ones represents another big plus.
Value driver 16: ★★ Growth dynamics and scalability. A key requirement for a good investment is growth. Its twin is scalability. Can you add new products or services, expand your geographic footprint to other countries, and/or grow your existing business without being overwhelmed?
Products and Services
Value driver 17: ★★ Market share. As a rule, the more of your market you control, the greater your valuation will be. Market share is one of the key value drivers and almost certainly deserves a place on your list.
Value driver 18: Product life cycle. Consider how many years your flagship products have remaining in their life cycle. At what point will they need to be replaced or risk becoming defunct? A longer life span removes risk and increases your value.
Value driver 19: Pricing power. The ability to raise prices without a significant decline in sales indicates pricing power. Investors prefer companies that can increase prices rather than those whose sales are highly sensitive to pricing.
Value driver 20: Supply chain. Do you have reliable access to the essential materials you need to manufacture your products and operate your business? What are your contingency plans in case your usual supply chains are disrupted?
Value driver 21: Manufacturing quality. Take emotion and pride out of the equation when you consider this question. Frequent complaints about quality will diminish your value and make your business more vulnerable to competition.
Value driver 22: Store locations and distribution channels. How do you get your products or services to market? Better locations and broader distribution channels add to your value.
Value driver 23: Time to market. How quickly can you get finished products or services to market? What is the average for your industry, and how do you compare? This will be more vital for some industries than others.
Your Team
Value driver 24: ★★ Leadership: This quality is among the most delicate for you and your team and among the most important to assess as objectively as possible. Leadership is likely a key part of your valuation and is often considered in combination with the next value driver, management team.
Value driver 25: Management team. Are you dependent on one senior executive, or does a deep bench support her? If you lose team members, can others take their place without missing a beat?
Value driver 26: Labor pool. Do you have access to the right population for future employees? Do they have the skills you need? What is the competition like for the best employees?
Value driver 27: Employee satisfaction. Are yours enthusiastic and committed to your success? What is your turnover rate? What is your rating on Glassdoor?
Customer Relationships
Value driver 28: Quality of the customer base. If you cater mainly to other businesses, are they blue chip or outfits nobody has heard of? If your customers are consumers, are their demographics attractive?
Value driver 29: Customer engagement. What is the average tenure for your clients or customers? Is your renewal rate high, or do customers consistently drop away and need to be replenished? Engaged and committed customers are valuable to any business.
Value driver 30: Customer diversity. Are you dependent on a few clients who represent most of your revenue? This could expose your business to sudden decreases in revenue and profits.
Value driver 31: Customer experience. How do customers rate your business, and what level of trust do your relationships generate? Is that rating improving or declining?
Value driver 32: Customer acquisition cost. Does it take weeks or months of wooing to land new clients or customers, or do they actively seek out your products and expertise?
Third-Party Relationships
Value driver 33: Joint venture partners and strategic alliances. Do you have partners who make your business more effective? There is the magic formula where one plus one equals three, when each brings something important to the relationship and helps create a stronger whole.
with vendors favorable or onerous? Do you have good relationships with your vendors? In a crisis, will you get priority over others?
Value driver 35: Licensing partners. Many businesses make significant profits by licensing their intellectual property to others.
Value driver 36: Franchisor-franchisee relationships. If your model depends on your relationship with a franchisor, is it a story of mutual benefit and growth, or has it been strained by conflicts? Is the franchisor a well-regarded company in its own right? These questions will have an important influence on your value.
Value driver 37: Advisors. Is the industry guru part of your team? Board members and consultants can add value to your business.
Finance and Planning
Value driver 38: Reliable financial planning and reporting. Sound financial management–including a strategic plan, audited financials, and an annual budget—is essential to success. Poor financial systems are a significant risk that decreases value.
Value driver 39: Acquisition expertise. Is your team skilled at acquiring businesses, with experience doing so?
Value driver 40: Financial controls. How good are your financial controls and safeguards against theft and financial irregularities?
Value driver 41: Capital requirements. Does your business have high or low capital expenditure requirements? Low requirements for day-to-day operations free up capital for other purposes.
Value driver 42: Access to capital. Midsize companies may have limited options in tapping additional equity or debt capital. Do the principals in your company have deep pockets and a willingness to invest more? Do you have an established credit line with your bank?
Investments
Value driver 43: Technology and R&D. Is your technology up to date or in need of an overhaul? Have you invested enough in R&D to protect future revenue? Investors like to see companies that have consistently invested in R&D
Value driver 44: Growth investments. Do you have investments in new businesses that could bring future value to your company? Alphabet has made many bets on new businesses that are different from Google and that could add tremendous value to the parent company. Unlike acquisitions, these new business possibilities are incubated within your company.
Value driver 45: Cybersecurity. Another key consideration is the effectiveness of your systems for handling cybersecurity risks. In an age when hackers may strike from within your own walls or from the other side of the world, the safety of your business, your clients, and your reputation relies on investing in robust defenses.